Despite the slow pace of its implementation, retail banks in Europe are under no illusions about the threat that open banking ultimately represents to their business. With the revised Payment Services Directive Two (PSD2) having come into force at the beginning of this year (although final terms are not due until September 2019), the writing is seemingly on the wall for traditional bank payments services.
New payment initiation service providers (PISPs) and account information service providers (AISPs) will now be able to initiate transactions and retrieve balance and transaction data from any bank account, providing that the customer has given their consent. A survey by Accenture shows that more than 50% of consumers will use a PISP product providing that they are certain it is secure; and that one in 10 credit card payments and one in three debit card payments are expected to move to a PISP by 2020.
This leaves the retail banks with the costs of account infrastructure but not the revenue from its day-to-day activities. They have, therefore, been swift to establish AISPs and PISPs of their own. ING-owned Yolt allows customers to view all their accounts and credit cards in one place, as well as providing spending categorization and budgeting tools. HSBC launched its Connected Money app in May, on which customers can view accounts from up to 21 different banks in one place, and First Direct has partnered with fintech Bud to do the same thing.
Clients are less interested in big moments – they are expecting more service in the small moments- Thierry Mennesson, Oliver Wyman
Banks are also working with fintech PISPs. BBVA has partnered with Spanish fintech Fintronic, which can process loan applications of up to €30,000 entirely on the app, regardless of the institution providing the money. And in Germany, Postbank, Norisbank and SWK Bank have worked with PISP Numbrs.
The Accenture survey does provide some solace for the banks: 76% of consumers are expected to choose traditional banks as their PISPs rather than third parties. Nevertheless, if an increasing number of clients conduct transactions through third-party apps rather than directly with the bank, the latter’s key strength – its relationship with its clients – breaks down. UK-based PISP Token conducted the first end-to-end payment by a licensed PISP through Santander’s API on June 1 this year, for £4.99.
“In essence, what the digital giants want are the benefits of retail banking but not the burdens,” points out Thierry Mennesson, partner at Oliver Wyman. “They do not want to have to deal with balance sheets and licensing, while they want the relationships with the clients through payments, transitions and frequency. However, they also don’t have strong client relationships or a wide offering of products in that matter. They therefore need to collaborate with the established retail banks in order to gain market share.”
Mennesson argues that banks now need to rethink what they offer to their retail clients as their client-facing transaction businesses are disintermediated by third-party apps. “Clients are less interested in big moments – they are expecting more service in the small moments. They want to get more from everyday transactions and banks are failing to support this,” he tells Euromoney. At the moment the banks still have the customers, but if they don’t act fast they will lose them.
The solution, according to Mennesson, is for retail banks to become life coaches. The data they have on a client’s saving capacity and spending habits, lifestyle and areas of interest mean that they need to go beyond banking. The traditional way in which a retail bank interacts with its customers – the branch – is disappearing for day-to-day transactions.
Retail banks have on average between five and 10 touch points with their customers a month – this needs to increase to one a day. By offering more advice on how to do more with the money customers have – in essence, becoming a financial butler – and collecting fees from changes that are subsequently made (for example from changing electricity supplier), the banks can supplement some of the income that they have lost to the competition.
It seems somewhat fanciful to suggest that banks can replace their lost payments revenue by offering advice on which unused gym membership to cancel. But it is clear that they will have to do something and this might just help. Banks do not want to become simple utility infrastructure – the train tracks along which the more lucrative payments businesses are run by unregulated, third-party fintechs.
They therefore need to compete aggressively on customer experience to protect market share. A focus on their day-to-day digital offerings, rather than on one-off events such as mortgages, will pay off if it keeps customers close. The digital giants have set the bar very high when it comes to customer experience and this is what the non-bank PISPs are trying to replicate without being burdened by the cost of regulation and balance sheets. But the banks have huge resources at their disposal to beat PISPs at their own game. They had better start to use them.